Overbilling Reaches Into Federal and Taxpayers' Pockets

Major U.S. law firms have a long and disappointing history of overbilling clients, so it is not surprising that a recent audit of the federal Troubled Asset Relief Program (TARP) found that even the Treasury Department is shelling out too much money to law firms.

Unsurprisingly, the U.S. taxpayer is ultimately responsible for paying the expenses.

Signed into law in 2008 by George W. Bush as a part of the Emergency Economic Stabilization Act, TARP is meant to promote economic stability by“enabl[ing] the Department of the Treasury to purchase or insure troubled assets.” Cristy Romero, TARP’s Special Inspector General (SIGTARP) and former financial restructuring counsel for Akin Gump Hauer & Feld, recently compiled and released a performance audit report that investigates and analyzes fees paid by Office of Financial Stability (OFS) under TARP to five law firms, chief among them Venable LLP. The audit, the text of which can be found here, claims that nearly $700,000 of the $1 million paid to Venable by TARP is "questionable, the result of spurious and ‘vague’ billing practices."

"Vague" billing techniques include block billing, a practice that allows lawyers and legal professionals to charge their clients for services without providing a detailed description of services rendered. Not only is the practice of block billing largely considered unethical, it also gets attorneys into their own legal trouble. One recent example is the case of Duane Morris LLP, a law firm sued for $100 million for legal malpractice; the malpractice charge included block billing clients for $2.6 million “without detailing the nature or reason for the work.”

The audit was originally requested by Senator Tom Coburn in an attempt to hold the Treasury—in particular, the Office of Financial Stability (OFS) and TARP—accountable for "wasteful spending" of taxpayer money. On his website, Coburn publicizes this wasteful spending, saying that the OFS “has spent tens of millions of taxpayer dollars on outside legal fees to assist its efforts.”  Venable was only one of five law firms whose charges were under scrutiny; the audit, which began in May 2010 and ended in March 2011, found that as of December 31, 2010, the Treasury had paid a whopping $27 million in legal fees to these five firms.

Although seemingly predatory and greedy practices such as block billing are, on the surface, to blame for the unnecessary expenses incurred by the U.S. Treasury, the audit overseen by Romero is above all else a "performance" audit, conducted so as to ensure that the federal government is responsibly doling out taxpayers’ dollars. Ultimately, the federal government is responsible for being responsible—Romero recognizes this in the audit, stating

If OFS had included specific, detailed provisions regarding billing methods and allowable services and costs in its contract with Venable, or had more effective internal procedures for reviewing legal fee bills, the billing methods SIGTARP observed should not have been allowed.

At least some government officials, such as Romero and Coburn, have held OFS accountable for their lack of oversight.

Especially in light of the federal budget woes, it is difficult to believe a government agency could be throwing away millions. Even in a booming, healthy economic environment, this careless is condemnable--but when countless programs like Medicare and Medicaid are up for restructuring, cuts, or complete annihilation, this financial haphazardness could have a deep and lasting impact on the nation's most vulnerable populations.  

Over Billing of Treasury by U.S. Law Firms

Elder Lawyers Game Medicaid -- Law or No Law

Here's an ad that runs almost every day in my local newspaper under the heading "Medicaid Law:"

"Many people needlessly lose their homes and spend their life savings to become eligible for Medicaid benefits. With the correct advice from a qualified elder law attorney, significant assets can be saved at any time, even when a family member is already in a nursing home."

Before you accept the services of such a "qualified elder law attorney," consider the following. Medicaid is the welfare program that provides medical assistance. To be eligible for Medicaid, a person has to be poor, just like welfare programs that provide cash assistance. According to the Congressional Budget Office, about one-third of Medicaid’s spending is for long-term care, which includes nursing home services. 

In many cases, individuals who are not eligible for Medicaid go into nursing homes, spend their savings to pay for the nursing home, and then they are poor enough to qualify for Medicaid. In that case, the Medicaid program begins picking up the tab for the nursing home. That is the way the system is supposed to work.

For years, however, middle class -- and even affluent -- Americans have figured out ways to game the system. They transfer significant assets to their children or others in order to become "poor" enough to qualify for Medicaid when they go into a nursing home. This practice was curtailed somewhat by new rules under the federal Deficit Reduction Act of 2005. But as the advertisement I quoted shows, there is still an industry of elder lawyers who help middle class people have their cake and eat it too. They collect welfare and bequeath their assets to their heirs.

Now consider this. Since 1997, it has been a crime under federal law to counsel an individual to dispose of assets in order to become eligible for Medicaid. No, that’s wrong, the elder lawyers say. The courts have found that federal law to be unconstitutional. I’ve got a First Amendment right to advise my clients how to qualify for Medicaid. It’s freedom of speech. The case is called New York State Bar Association v Reno. Look it up!

So the lawyers who advise their clients how to transfer their assets in order to become eligible for Medicaid are supposedly doing something that is legal, even though it is in fact a crime. Their bar associations will also maintain that it is ethical, at least by the ethical canons that they have created for themselves. After all, attorneys defend rapists and murderers, right?

In my opinion, however, it is wrong to collect welfare if you’re not really poor. The mentality that makes people think that they are entitled to save and pass on "significant assets" to their children while collecting welfare is the same mentality behind the push to lower if not eliminate the estate tax. Can’t the children of the middle class earn money for themselves rather than inheriting money from parents who are on welfare? What ever happened to the concept of meritocracy?

If you’re middle class and you want to protect yourself against the risk that your life savings will be drained by the cost of a nursing home, please don’t go to an elder lawyer. Go out and get yourself some good long-term health insurance.

Crooked Lawyers Ruin it for the Rest

The New York Times reports that in California it is now virtually impossible to find legal help fighting a foreclosure. That is because the state recently passed laws making it illegal for attorneys to accept up front payment for help in those kinds of cases.

It is not unprecedented for lawyers to work under those conditions. Personal injury and medical malpractice lawyers do not get paid until settlement. The difference, according to the article, is that people in foreclosure often wind up in bankruptcy as well. This mean that a lawyer waiting until the end of a case for payment may never get paid.

California lawmakers did not spin the rules out thin air. Foreclosure help fraud has become a favorite scam for those wishing to make a quick buck. The scammer offers to help the homeowner for an up front fee.  The homeowner pays the fee and never receives any help.  Outlawing up front payment makes it much harder to run a scam like this without attracting the attention of the authorities. Unfortunately the law also makes it an extremely risky proposition to take on a foreclosure case. Payday could be years away, if it ever comes at all.

Clearly part of the problem is that the legislation was ineptly written but the deeper problem is that the legislation was needed in the first place. There has been a lot of talk recently about the need for regulation in every sphere of public life. Some say the regulation is too much, that it stifles the free market on which the American economy is based. But our culture of corruption necessitates such measures. If there is a moral to the story it is that the price of corruption is regulation.  Unfortunately that also means that good and services will be less convenient, more expensive, and  cases totally unavailable.

Jonathan Bristol: Lawyer Allegedly Aided Ponzi Scheme

Anyone who has watched a lot of mafia movies -- or a lot of local news in the New York metro area -- is familiar with the figure of the "mob counsel" -- the lawyer so close to his clients that he, in effect, is part of their criminal enteprise.

Well, it turns out that mafia dons are not alone in having lawyers who actively abet their crimes. Plenty of white collar criminals do as well. In fact, much of the time you find a complex fraud or sophisticated scheme to cheat in business or finance, you'll also find a lawyer who helped facilitate things.

The latest example may be Jonathan Bristol, formerly of Winston & Strawn LLP, who has been charged with helping Ponzi Schemer Kenneth Starr hide millions of dollars in ill-gotten gains. "Bristol crossed the line from lawyer to conspirator when he failed to safeguard funds entrusted to him, helped Starr steal client money, and lied to the victims to perpetuate the scheme," said George S. Canellos, director of the SEC's New York Regional Office. The SEC complaint against Bristol alleges:

To avoid detection of the misappropriation scheme, Bristol repeatedly
allowed Starr, beginning in or around November 2008 until Starr's arrest in May 2010, to
use Bristol's attorney trust accounts (collectively, the "Attorney Trust Account") as
conduit accounts when Starr stole assets from Starrco's and SIA's clients (the "Starr
clients"). Bristol, who was the sole owner ofthe Attorney Trust Account and had sole
authority to authorize outgoing transfers, would then send these monies to the Starr
Parties among others, even though Bristol knew that the money belonged to the Starr
clients. Bristol did not disclose the existence of the Attorney Trust Account to any of his
colleagues at his law firm.

If the SEC charges are true, and that remains to be seen, Jonathan Bristol would seem to be a classic example of a respectable professional who lost his way morally somewhere along the line -- as so easily happens in a society where wealth is an all-important arbiter of personal worth and status and where corruption seems to be everywhere.

Bristol attended Amherst College (class of '78), graduated from the University of Virginia Law School in 1981, and worked at a prominent firm. (See more about him here, including a photo.) As a younger, presumably more idealistic man, Jonathan Bristol served as a member of the New Jersey Supreme Court's Office of Attorney Ethics.

Bristol tried to maintain the profile of respectability even after Starr was busted, and that's the real kicker of the SEC's complaint:

Notwithstanding Bristol's personal role in the misappropriation scheme, Bristol represented the Starr Parties throughout the Commission's investigation ofthis matter and in connection with a cause examination of SIA by the Commission's examination staff. Bristol also attempted to represent at least one victim of the fraud after the victim was contacted by the Commission. In addition to the fact that such representations violated the ethical obligations of lawyers, Bristol's clear intent was to obstruct and undermine the Commission's investigation and cause exam in order to conceal the Starr Parties' - as well as his own - wrongdoing.

Talk about chutzpah! You can get all the details of Jonathan Bristol's work on behalf of Kenneth Starr in the complaint below.

Complaint Against Jonathan Bristol, Lawyer to Kenneth Starr

A "Foreclosure Mill" Law Firm Faces Scrutiny

A troubling truth about today's white collar crime wave is that wherever there is a complicated fraud, there is usually a lawyer helping make it happen -- or even a whole firm of lawyers.

That was the case in the dotcom era, where Enron and other companies cooked their books with the help of top law firms. And it was also true of the subprime mortgage shanigans, where lawyers were on hand to help generate the loan contracts that hoodwinked consumers and, on Wall Street, helped structure some of the shady deals that securitized mortgage debt.

So it should come as no great surprise that lawyers are now implicated in some of the bad behavior that has surrounded the collapse of the housing market and the epidemic of foreclosures. Specifically, a number of law firms have been accused of generating false documentation for banks intent on repossessing homes as fast as possible. These so-called "foreclosure mills" are said to have created paper trails to prove bank ownership of homes in those cases where proper record-keeping was ignored during boom times. 

New insights into how foreclosure mills operate have emerged in Florida, where the state Attorney General is going after David Stern, a lawyer known as the "Foreclosure King." Stern's business model was based on volume and his firm was paid $1,400 to produce documents for each foreclosure. That put a premium on churning out the documents fast and the firm became adept at doing exactly that. According to a deposition of a key Stern employee, taken by the Attorney General's office, over 1,000 foreclosure documents were sometimes signed in a single day without being reviewed and without any witnesses present, as required by notarization rules. Often signatures were forged. (Read the deposition to get an inside look at how a foreclosure mill operates.) One paralegal claims she was fired after refusing to falsify documents. Asked about the investigations into foreclosure fraud, the paralegal, Tammie Lou Kapusta, told ABCNews.com: "This is just the beginning really. . . . It's the tip of an extreme iceberg."

Stern's firm filed a staggering 70,382 foreclosure cases in 2009 and reportedly billed nearly $100 million. As explained by the deposed employee, Kelly Scott, the firm was always under heavy pressure from lenders -- including Fannie Mae and Freddie Mac -- to speed up the processing of documents. 

The case against Stern is still under investigation and no charges have been filed against him. Stern's lawyer says that the campaign to vilify him is unfair and advances the interests of "a well-organized defense bar who is making a lot of money keeping people in their homes." Others say that it's the banks that are to blame for the existence of foreclosure mills in the first place, which is a good point. 

One thing that is clear, though, is that Stern has done very well for himself as the "Foreclosure King." He reportedly owns a $20 million yacht, a $15 million mansion, and several other expensive properties. Along with the bankers who have made record profits thanks to zero interest lending, Stern is an example of those who have prospered as a result of the financial crash. Greed, it turns out, thrives in both good times and bad.

David Stern may, in fact, not be a bad guy. But it can be pretty tempting to forget about ethics when there's the potential to make tens of millions of dollars by systematically cutting corners. Especially when the chances of punishment are pretty slim. 

Beyond the investigation by the state Attorney General, Stern may eventually face judgement before his peers in the Florida State Bar Association. But don't expect much there, even if it turns out that Stern has been unethical. State bars have a spotty track record at best of disciplining their own members.